Page 86 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.77, # 1, 2020, pp. 84-91

obligations will lead to an increased demand for foreign currencies on the part of the
government. However, this increased demand on the part of the government will be
neutralized by the decreased demand of the reduced exercises of the IBA. In other
words, the foreign exchange demand emerging from budget spending will be
compensated by the Oil Fund's supply and will not be a serious source of risk.

II. Credit Policy – One of the components that temporarily affect currency demand
in the markets is the lending policy of banks. Loans offered in manat can raise the
demand for the currency and put pressure on it. However, alongside factors such as
the weakening of the loan repayment capacity of the real sector, the increase in
problem assets and the aggravation of the financial position of borrowers by
increasing their debt burden due to the devaluation, a shrinking credit policy can be
implemented by local banks. As a result, the credit investments of banks to the
economy can decrease. As a result, excess liquidity can be observed in banks.
Nevertheless, banks are not interested in credit, despite the existing risks; the Central
Bank's manat deposit auctions enable them to manage funds without risk. Moreover,
giving loans in manat with higher interest rates is another factor that declines
demand. Thus, the likelihood of an increase in manat lending in 2018 is low. It
weakens the probability of pressure on the manat’s rate in the mentioned direction.

EXCHANGE RATE REGULATION
Central Bank of Azerbaijan tried to keep exchange rates fixed through foreign
exchange reserves during almost a decade. In 2015, both the cash and non-cash
segments of the foreign exchange market witnessed a big fall in foreign exchange
supply, and a sharp rise in foreign exchange demand.

As a result of the oil price fall in world markets, transfers from State Oil Fund to budget
decreased. Eventually, foreign exchange sales of the State Oil Fund of the Republic of
Azerbaijan (SOFAZ) fell by 33 percent relative to the previous year. Big rise in demand
for foreign currency is explained by high level of dollarization. (CBAR, 2016).

Decreasing oil prices since 2014 have affected new market conditions and shaped
national currency of Azerbaijan. During financial crisis in 2008 our country faced
economic challenges that Central Bank attempted to protect the stability of exchange
rate system with the expense of spending currency reserves. Although this operation
just started in August 2014, during the third quarter only 0.2 billion dollars were used
for intervention. After the end of 2014, intervention spending sharply increased like
1.68 billion dollars respectively and at the end currency reserves decreased about 26.6
% which was 11 billion dollars within 3 months. Main reasons for government

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